The road seems less bumpy these days for insurance carriers that use state-of-the-art automated compensation to calculate and track agents' commissions. A single streamlined third-party system can replace a hodgepodge of legacy software and manual processes, users say, helping to reduce clerical work, increase accuracy and improve reporting. Moreover, carriers report that the software opens up a whole new world of analysis that pinpoints the true sources of profit and helps identify and retain the best agents.The accuracy rate for commissions at Blue Cross Blue Shield of Florida, for example, has improved from 80% before introducing up-to-date automated compensation to 95% after the implementation, says Linda Lamb, BCBSF vice president of sales business management. The remaining errors arise from data entry miscues or software problems outside the system, she says.
Accuracy has become easier to attain after introducing a new automated compensation system at Coventry Health Care, Bethesda, Md., says Claire Herrell, the company manager of broker systems. "We actually do feel we were accurate in what we were paying before, but this way it is much less time-consuming to guarantee that accuracy," she says.
Bringing together the storage and functions that had been spread across a number of systems into a single new program improves accuracy by helping to ensure that carriers apply business rules consistently, says Bill Price, BCBSF director of sales compensation. "A clear objective [with the new system] also was to ensure that we're applying consistent business rules," he says. "When you have multiple platforms and multiple data feeds, it's sometimes difficult to ensure you are consistently paying the transaction in the same manner on all of the systems."
Checks and balances in the new systems ensure accuracy, comparing data when a commission is entered in, says Tracy Cale, commission manager for MetLife Auto & Home Insurance Agency Inc., Warwick, R.I. Cale works for the carrier but in association with a company-owned agency.
Better controls and audit trails in the new BCBSF system serve as reality checks on accuracy and make administering the system more comfortable, says Lamb. "We are catching errors and identifying issues that need to be worked out-even if it's outside our comp process."
Accuracy also improves because the new systems eliminate manual processes, carriers say. "Anytime when you have a lot of manual processes going on, the potential for error is greater," says Price. At many insurance companies those manual processes can include comparing figures on spread sheets. The new system at BCBSF gives agents online access to information they used to get from printed statements and reports, while also automatically populating some blanks on forms, including the commission rate, to reduce data-entry errors, Price says.
Cale also says she likes having better accuracy and having more online reports. "In the old system, we could key it in and pull some ad hoc reports," she says, "but nothing like we can pull now. We can actually get down to the distribution level, line of business and the state that it came from."
More accuracy and better reports also put carriers in a better position to answer quickly when queried by state and federal regulators, says Chad Hersh, senior analyst in the insurance practice at Celent LLC, the Boston-based research firm. "If it's not automated, you're running a huge compliance and regulatory risk," he warns.
ANALYSIS PAYS OFF
Once carriers have improved their compensation accuracy with the help of their new systems, they can turn their attention to analyzing the newly centralized data and thus gain greater understanding of their businesses, says Coventry's Herrell.
"It will allow a great deal more analysis on brokers' total blocks of businesses and profitability of that business," she says. "You'll know when you're incenting the right pieces of business and can identify the brokers bringing us the better business and the worse business. It's a wonderful advantage."
With the new system BCBSF can focus resources on analysis rather than on operating the old stable of systems, says Price. "We're able to see the full spectrum of an agent's business-the value they bring to us and the value we bring to them," he says. The company also is tracking trends and using that information to help improve programs, says Price.
Besides improving analysis, carriers expect to make changes in their compensation methods much more quickly with single new systems than they could with a flock of legacy systems. "With the system, we see that in the future we will be able to conduct much better tests and forecast possible commission scale changes," says Herrell. "We will be able to take the system and project what commissions would be if we made certain tweaks to the scale."
Does that mean that changing the commissions structure used to carry an element of the unknown? "To some extent," answers Herrell. "This way, we will be able to push the forecasted numbers straight through the system," she says of the new software. 'This [new] system will allow us to be able to implement different commissions structures in a much more timely fashion."
Some of that greater speed comes from not having to reprogram the system, which isn't necessary with the new software. "Most legacy systems are, for lack of a better word, hard-coded," says Herrell. "When they want to do a major change in the whole calculation philosophy, they have to reprogram. [The new system provides] the flexibility to go ahead and change the whole concept of how the scales are calculated."
Price at BCBSF sees similar improvements in the ability to change compensation methods quickly and easily with the new system. "In the old environment, with all the legacy systems and the manual systems, we were hampered in our ability to offer more creative design," he says. "With the new platform we are able to go to different types of arrangements that we would not have the ability to do in the past."
All of the improvements in accuracy, analysis, reporting and flexibility combine to make agents happier and less likely to jump to another carrier, the insurers say. "How you structure your commission program is a draw for your distribution channel-how you administer it and how effectively you deal with agents can retain and helps attract new agents," says Price.
However, the changes wrought by a new compensation system can send shockwaves through a carrier's compensation department, as much of the work shifts from clerical to analytical, the carriers say.
"I'm sure that eventually staff will be more in a role of oversight and analyzing the data instead of data entry and calculation," says Herrell.
The change to a single system altered roles for some employees and eliminated some jobs at BCBSF, says Lamb, the vice president of sales business management. "Giving up that responsibility and that control was probably our biggest challenge, vs. the system implementation itself," she says.
RETAINING AGENTS
To help meet that challenge, BCBSF used third-party staffing from a company with experts in compensation. "We had to bring new people in with new competencies-not only to understand the new processes and be able to do the financial modeling but to be able to interact with the agents in a very effective manner," says Lamb.
That same third-party used its experience with several compensation software vendors to help BCBSF choose a supplier for the project, says Price. But hiring outside assistance was only the beginning of the three-month selection and implementation process.
FORM A TEAM
An assessment team at BCBSF evaluated criteria assigned to five buckets. The compensation department, for example, assessed business requirements, while IT examined architecture. BCBSF contacted companies that used the various software offerings and also witnessed demonstrations at their own headquarters and at vendors' locations.
"The way we approached it-getting engagement in all functional areas-helped us overcome any type of political barriers we might have internally," says Price. Lamb agrees, adding that "we kept engaging folks. They were very supportive of what we were trying to do."
In December 2004, BCBSF signed a contract with San Jose, Calif.-based Callidus Software Inc. The first of a three-phase implementation began in January 2005, with another group of agents added in each phase. The plan called for changing from 17 data feeds and six commission platforms to two data feeds and a single centralized platform.
Phase I took eight months at BCBSF while the staff and third-party experts put data into a format that would work with the Callidus system, Price says. Lamb notes that old set of systems was fragmented. "So, it wasn't a matter of just putting in a new system that supports our current processes. We had to revamp the whole process, centralize a lot of things that were being done out in the organization."
To this day, the centralization work continues, says Lamb: "We still find things that someone is processing-commissions that we weren't aware of. So we continue to bring all that in-house and under one shop."
During Phases I and II, BCBSF and their third-party consultant worked closely with the Callidus staff. By the third part of the implementation, the carrier needed less help from the vendor. Now that the third portion of the project has been completed, BCBSF needs Callidus experts only as consultants for support and to install new software releases, Price says.
While BCBSF has put all of the parts of a new system in place, Coventry is still converting pieces of business to new software from Birmingham, Ala.-based Actek, after signing up in 2006. "We went live over the weekend with commissions for our private fee-for-service product," Herrell said in November.
Coventry has been using a legacy system but hopes to have all of the agents on the new system within 12 to 18 months after the first part went online, says Herrell. "Our homegrown system had reached its limits, and the technology that was available from off-the-shelf packages had greatly increased over the past few years."
She says the system her company chose does not need much customization to operate but provides for easy customization when the carrier wants it. "It's not that you're stuck having to use certain fields," she says. "You can define fields the way you want them for your calculations."
Acceptance of the new system has approached "100%" at Coventry, says Herrell. She describes the implementation as a high-profile project that brought together team members from enrollment, billing, finance and other areas-for long hours of work. "All facets of the company have had to work together because commissions encompass all facets," she says.
The vendor won Herrell's praise: "We have had complete and total teamwork between Coventry and Actek to get this done."
Unlike Coventry, a relative newcomer to Actek, MetLife has been using the vendor's system since 2003, says Cale. The company acquired the software during a time of rapid grow and appreciated the product's scalability, she says. "We can add as many companies, users and commission schedules as we like, and it doesn't require new code," she says. "It just requires going in and keying in the additional needs."
SLOW ADOPTERS
Despite the advantages carriers laud in their new systems, most companies are clinging to their old ways of figuring compensation. Although industry observers hesitate to estimate how many have made the switch, some agree with Ken Sales, the director for implementation with clients at Computer Sciences Corp., El Segundo, Calif., that approximately 70% to 80% of carriers still use legacy software.
Some say large carriers hesitate because of the poor condition of so much of their data and the daunting task of trying to integrate complex systems and hierarchies, says Tom Davis, Actek vice president of sales.
The smallest carriers and most agencies balk at the cost of making the change, according to others in the business.
Licensing fees for the first year usually range from $125,000 to $1 million at Actek but can reach $3 million to $5 million with some vendors, Davis says.
Although setups vary, carriers often can expect an additional fee for implementation and, in subsequent years, a reduced annual licensing fee (18% to 22% of the first-year fee), and an annual maintenance charge for support and new releases.
Talk of payment gives rise to a question: What can the new systems mean in dollars and cents?
At BCBSF, company executives can't really sort out how much of the company's recent success they can attribute to the software, but they attest to the system's support of rapid growth.
During the implementation, the company also introduced 38 lower-cost products. Membership reached 4 million in October and was on track to expand by 280,000 in 2006. Small group sales doubled.
"We already are seeing some real benefits from what we've been doing," says Price, adding that "we have a great opportunity ahead in taking the data and helping us make better decisions, [and] evaluating the effectiveness of changes that we might make to our programs."
Bob Warfield, Callidus senior vice president of engineering and CTO, gives the example of a carrier that made a compensation deal with an agency and then learned the IT department would need a year to work out the underlying software. With the new system no programming is required.
"Now, you're talking about sales performance management," says Warfield, "where I can use this tool to radically affect the revenue outcome of my business."
